Indonesia Defies Weak Exports to Post Robust Growth

Tuesday, 5 Feb 2013 | 1:33 AM ETReuters

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Jakarta

Indonesia reported marginally lower-than-expected economic growth of 6.23 percent in 2012, a year in which robust domestic demand and investment outweighed declining exports and a trade deficit that put pressure on the country's currency.

The annual rate for expansion of gross domestic product (GDP) was slightly below 2011's pace of 6.5 percent and just under the 6.3 percent median forecast in a Reuters poll.

In the final quarter of 2012, the annual growth rate was 6.11 percent, compared with 6.2 percent in the previous quarter and in the poll forecast.

On a quarter-to-quarter basis, the economy contracted 1.45 percent in October-December, according to the statistics bureau, or more than the poll forecast of a 1.3 percent drop. In the three preceding years, Indonesia also reported a contraction in the fourth quarter on an seasonally-unadjusted basis.

In each of the past three years, Indonesia has had annual growth of more than 6 percent, spurring global interest in the resource-rich country that is Southeast Asia's largest economy. Investors have been drawn by the resources, a rising middle class that's consuming more and a young population.

It's uncertain if Indonesia can continue to have growth above 6 percent this year.

Gundy Cahyadi, economist at OCBC Bank in Singapore, said "for now" he is maintaining an estimate of 6.5 percent GDP growth in 2013. But he added that December trade data released last week included a disconcerting drop in capital goods imports and it would be "worrying trend" if these keep dropping.

During 2012, Indonesia has robust investment and consumption. Auto sales set a new record of 1 million vehicles despite regulations requiring higher downpayments.

Domestic consumption, which accounts more than 50 percent of the economy, helped the country attract a record 221 trillion rupiah ($22.8 billion) in foreign direct investment last year, a 26 percent increase from 2011.

There are substantial economic concerns. Current account deficits have been large, there are large infrastructure woes and economists say the government must slash costly fuel subsidies this year. In 2012, Indonesia spent 211 trillion rupiah on fuel subsidies.

If fuel costs are raised, inflation will rise from 2012's tame 4.32 percent level, which was kept down because the government scrapped a plan to hike fuel prices early in the year.

Low inflation has let Bank Indonesia keep its benchmark rate at a record low of 5.75 percent for 11 months.

Analysts expect the central bank will to hold its policy rate at a February 12 meeting, as January inflation stayed benign at 4.57 percent.

In 2012, Indonesia reported its first annual trade deficit of $1.63 billion, after weak demand hamper exports to have fallen 6.6 percent. While imports stayed strong as a result of the abundance FDI and increased fuel consumption.

High fuel imports have raised concern among offshore investors about the current account deficit and the rupiah.